Taxes are so applicable to everyone and there are some very basic things that people can do if they understand how taxes work that will help them save on taxes, sometimes even thousands of dollars.
In this episode, Zacc Call and Laura Hadley aim to help you better understand your tax return while also providing tax strategies that can help you save money.
Zacc and Laura discuss:
[00:00:00] Welcome to the Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have, whether you're doing it yourself or working with a financial advisor. These episodes will help you break down complicated financial topics to practical, actionable steps. Our mission is to guide motivated people to become financially successful. Hey, everybody. Welcome back. This is Season four, season four, all about taxes. Which we were talking right before we started this. Zacc goes, oh, this is gonna be a dry episode. And I think, no, this is exciting. This is really important for everybody to know. And I guess that, and that's when we knew I'm becoming a nerd. Exactly. That's when we knew we got Laura into the industry fully. She's all the way in. It can be boring, but I feel like taxes are so applicable to everybody. Oh yeah. I don't care if people think this is boring. I am pumped. I love taxes. Yeah. And I have found that some of my most fulfilling conversations with people have been. For example, sometimes the fee we charge for asset
[00:01:00] management and overall helping clients, oftentimes we can make that back entirely just with some taxes. Taxes. I feel like nothing feels better than getting more back from your taxes, not paying as much. Everybody feels good about that, and that's what it's all about. The more that you can understand your taxes, the more that you can do to avoid your taxes. I'll just throw this out there. I'm not a big fan of crazy high risk tax moves that are going to subject you to audits and issues, but there are some very basic things that people can do if they understand how taxes work, that will help them save on taxes, sometimes thousands of dollars. It's not a big deal to just do a few extra things. You do need a baseline understanding of how taxes work, and then many more things will click. So throughout this season, Our first episode is tax basics. We almost named it how the government calculates your taxes. That sounded pretty dry. So does tax basics. Yeah. You know that's true. What don't know what we're doing in terms of marketing, but we do know about taxes. Yes. So we're gonna do that.
[00:02:00] We're excited to do it. You have to understand a few of these things. If you can make it through today and at least get a baseline understanding of how taxes are calculated for you, then you can enter the rest of this season with us and get a feel for specific strategies you can implement. So bear with us today. This is just laying the foundation for the rest of the season. And this will be helpful. People going in to meet with their CPAs or doing taxes on their own, they can understand a little bit more, oh, that's what my a g I means, or that's what the standard versus itemized means. Just understanding the language, how it actually applies to them can be helpful. So we're just diving in today talking about. What are the basics of my taxes? What's happening? So you start off with your total income, counting up everything that you're earning, most commonly wages, your w2, how much you're making it. It's also dividends that are kicked off from your stock investments and interest from your bonds, rental income that you have, business income. Any other types of income you can think of. Zacc, there's alimony.
[00:03:00] There's, let's see here. And alimony has some interesting. Tied to it for sure. So when I took the CFP many years, I don't know how many years ago it. I remember learning that alimony could have been taxed either direction, and I think since then they've made a change. Now where Alimo, it's 2019. 2019 is when it was well done. That's great. Anyway, it's taxed in one direction, meaning that the receiving spouse, I believe is always paying now. I'd have to look that one up. But anyway, going back, we're gonna do basics. Wow. We jumped right into a specific, terribly sorry, folks. Okay. If you could draw in your mind with me for a second, create a big bubble and just call it. and the government makes you throw just about everything in there. There are a few sources of income. You don't have to count in there. If you're retired, it might be like a Roth withdrawal or an HSA withdrawal. You don't have to add that in there. A few other things, which won't get into too far. There are some bonds that pay interest that you don't have to pay taxes on. We won't go too far into municipal. We did talk about that in
[00:04:00] the Bonds episode. Yeah, there you go. So go back and listen to. So you throw all your income into total income. Then the government says, all right, there are a couple things we're gonna let you subtract from that right away. And they call those above the line deductions. You've probably heard standard and itemized deductions. We're not talking about that yet. That's below the line deductions. So the reason they call it that is because they drew a horizontal line on the. Where they listed your adjusted gross income. They call it adjusted gross income because they take your gross income and they adjust it for a few things. Those are the above the line deductions. So your adjusted gross incomes, basically all your income. We've got that one big bubble, and then we got a bubble below it. We're just subtracting out things like your pre-tax four oh contributions or HSA contributions. They allow you to do charitable deduction each. That is above the line. So not
[00:05:00] itemized versus standard. We're gonna talk about that again in a minute. But in addition to that, so most charitable deductions fall below the line, but there's a small amount you can do above the line. And this is where alimony oc, we've got some notes here and Laura's got this all figured out, but so agreements prior to 2019 are different than the ones after 19. But if you are paying alimony and the agreement was after 19, you can deduct it from your adjusted gross. And then health insurance premiums for self-employed people. So a few things like that. Okay, so you take your total income and you do above the line deductions. You take all those last items that we just listed out and a few more, and then you get your adjusted gross income. That number is super important because many different eligibility thresholds are based on adjusted gross income, some eligibility t. Are based on modified adjusted gross income magi. So what's going on there is they're saying, take your adjusted gross
[00:06:00] income, but we're actually gonna bring some of those adjustments back because we don't think it's that great, for example. The Affordable Care Act, you can get a subsidy in healthcare, which is a whole new season. We're gonna talk about that at another time. Based on your income level, will they use modified adjusted gross income? They don't use adjusted gross income because they don't want people with a crazy amount of tax-free income from municipal bonds to also be getting subsidies on the exchange for healthcare. So they make them add their tax exempt interest back anyway, so you get that idea. Total income. I'm gonna keep repeating. We're just gonna keep doing this cuz repetition's gonna help. But I think you're gonna really understand your tax bill way better after this short episode. So starting at the top, gross income, subtract a few adjustments or deductions. Those are above the line. The line is adjust adjusted gross income. Now we're to a number that is used frequently for many eligibility. Some other things that this is used
[00:07:00] for lifetime earning credits if you're going to college or if you have a kid going to college or if you can do Roth contributions, that sort of thing. There are lots that it's used for, but that's the type of thing that's using this A G I adjusted gross income. Perfect. And this is not what you pay taxes on. This is just a number used for figuring out a whole bunch of eligibility thresholds if you are in retire. They use a modified adjusted gross income for your part B premiums for Medicare, your Part D for Medicare, and they call that Irma, I R M AA. So many acronyms. I know income related monthly adjustment amount is what that stands for, but that's basically a penalty if you make too much money. According to the government, the threshold is around 180,000, 190. I think it went up to 190, so. Keep a chart, but anyway, 190 something per year for a couple, about half that for an individual. If you're above that mark, you'll have a little bit of an adjustment. They use this modified adjusted gross income. Okay,
[00:08:00] so now you have your adjusted gross income. I'm sorry, I gotta go back. Modified adjusted gross income is really confusing too because there's not one modified adjust income. So many different ones. It's confusing. You have to look up which modified adjusted gross. Per eligibility, it's a different one for the healthcare considerations versus others and it gets really frustrating. And is it fair to say the AGI I is always the same? Yes. AGI is always the same. Your M A G I. Will be different. Yeah. Because it depends on what they decide to add back in. Yeah. Which is, and it's not the same for every piece of legislation that created, for example, the Affordable Care Act and Medicare Act I, they just tried to make it as confusing as possible. Oh, for sure. And succeeded for sure. They and they keep a lot of financial professionals in business guiding people through the mess. True. So then we take your adjusted gross income, and now we're going to subtract out the deduction that you get to choose between standard or item. And this is a little bit confusing because some people don't even realize that
[00:09:00] they're doing one or the other, but the government says, Hey, there are a bunch of things that we think you shouldn't have to pay taxes on this amount that you're paying for, whether it be charitable contributions or some state and local income tax, mortgage interest. Those are big medical expenses. Some medical expenses, it has to exceed a threshold first. They call that a tier two. So like a threshold of your A G I. Yeah, good point. Okay, so that's another one. So you have to cross a threshold of medical expenses of your agi I, and then you get to include the amount over that threshold of AGI I into the itemized deduction bucket to decide whether you're doing itemized or standard. Now, that is a mouthful, but the bottom line is just know that there's a lot going on inside the itemized section. And you may or may not be able to use that, or if it's really not that much. Let's say you don't do a ton of charitable giving. The standard deduction's pretty high now for a couple 27,700 is the new 2023 standard
[00:10:00] deduction. So it is high and a lot of people don't. Get that high in their itemized. So what people will do is they'll add up everything that's eligible for an itemized deduction. This is your charitable giving mortgage deduction, state and local income tax. And if that number is greater than the standard deduction, say we add it all up and it's 30,000, then you will take the itemized deduction. You will take that 30,000. If it's less, maybe it all adds up to only 15,000. You don't get to take it on top of the standard. You instead take the standard deduct. Yeah, and it's interesting because they had $30,000 of items they could deduct. But they could have deducted 27,700 without any of, without doing anything. So they really only benefited on the last $2,300 worth of deductible expenses. That's tricky. During Trump's time in office, he had a bill that basically doubled the standard deduction. I dunno if you guys remember this, but he talked about getting the whole tax
[00:11:00] filing process on a post. And that's kind of true. The tax filing, the 10 40 is now half a page, but they basically took a bunch of things that were on the page, compressed them together and sent them to another page that's now called Schedule one. And on the schedule one, there are a bunch of things that are mostly applicable to people who have money and invest or have other income and businesses and things like that. So the reality is, Put it all in the closet. Yeah, , that's a great example. Just hit it all. So they just took all the clothes off the bed and put 'em in the closet? Yeah. Yeah. But the reality is for a lot of people though, it did get a lot simpler because a lot of the general public, they do not have a lot of these investments. Now. Fortunate enough, most people we talk to, Or people listening to this podcast probably do have a schedule one, some type of activity. Anyway, that's a little bit of a side tangent, but I just wanted to give you some history there. Said it's gonna be on a postcard. And then a second effort to simplify it was
[00:12:00] to double the standard deduction. And it did simplify it for a lot of people because they may have had $15,000 worth of itemized deductions and now being up closer to 27,000 for the standard where it was 12 before for a. And by the way, every year, this goes up a little bit, but back when they doubled it, it was 12 and it went to 24. So for a lot of those people now, the standard deduction just swallowed up any itemized work that they had going on, and they just decided to standardize. So now they don't have to do as much tracking of their itemized deductions and things like that. and just for people's information. For a single filer, it's about 13,008 50. Head of household, about 20,800 and not about, that's what it is, . So hopefully that's helpful. And Zacc, you bring up a good point. Some people might get discouraged thinking, well, I'm donating $15,000 a year to a charity and I'm still taking the standard deduction. I'm not benefiting. Yeah. I'm getting that small above the line deduction. , but I'm really not getting any other tax benefit for it. And so there are lots of
[00:13:00] strategies you can use to take advantage of the standard and the itemized deduction. For example, maybe you will double up your contributions in one year, and so that two years worth of charitable giving will end up being a lot more than the standard. And you take it that year, the next year you don't donate anything, and you just take the standard deduction. And we'll talk more about this in retiree Strateg. But this is why we want you to understand the difference between the standard and the itemized, so you can understand why these strategies even matter. That's in this season, right? They're retiring. It is. Okay. That's a very real example. I'm working on one right now, and by the way, we are so into tax planning that we take people's tax returns and we audit them, and we provide them with a report of 10 to 15 suggestions. We show 'em where they are in terms of all the phase. And we can even model out different scenarios, much like CPAs can, and then we'll show them, but we don't file taxes. We just strategize and then we have you work with your tax professionals to validate it and make sure that it fits and works,
[00:14:00] and then you guys can move forward and make it happen. That particular example we see all the time, people have $10,000 of state and local income tax deductions, and then $15,000 of charit. , and so that's 25. And like you said, they're missing it entirely by $2,000. To illustrate Laura's example, let's say that you took that the two $15,000 in two different years and you did next year's. This year you're stacking $15,000 on top two of that 15 falls within the standard, so they get to deduct an extra $13,000 that year. We'll get into exactly how that works, but depending on their tax rate, that would be a pretty big saving. I was just gonna talk about this. Seniors get an extra addition to their standard deduction. So if you and your spouse are both above the age of 65, you get an extra $3,000 on your standard deduction. If one person's over 65, you get $1,500, or if you have a single person over the age of 65, you get an extra 1850 on top of that standard deduction. So that's
[00:15:00] kind of nice. If you're older, do you have an extra benefit? A lot of our retirees worry about taxes in retirement, and what they don't realize is there are lots of tax benefits to when your senior standard deduction's, higher social security, not all of that is taxed, and you have some different strategies using QC ds that we'll talk about. So there are lots of school strategies for retirees. Most people we talk to have a lower tax rate by quite a bit in retirement. Some of our clients don't pay anything in taxes, which is mind blowing to them, but it's a reality. Now. Most of those people, they're probably showing income. 40 or $50,000 in a lot of it's social security and that probably works, but we even have some people that have a hundred thousand to $200,000 of income and paying in terms of a percentage, somewhere around half to two thirds of the rate of what they were paying when they were working because we can control a little better how they show income when they show income. What types of income from what accounts and taxes. All of there. Your nerdiness is showing a little bit. Z Oh shoot. . No, just kidding. That's why we get excited about it
[00:16:00] because you can use so many strateg. And save you money, which I think everybody gets excited about. Okay, so your senior couple that's over 65 and taking a standard deduction, so they get to take 27,700, and then you mentioned the $3,000 extra. So they are now taking a $30,700 deduction. All that means is if someone's adjusted gross income was a hundred thousand dollars. And they had deductions of $30,000. I know they have more than that, but we like easy math. They would then only have to pay taxes on $70,000, so they get $30,000 back of their income completely tax free. You take the $70,000 and you throw it through what are called the marginal tax rates, so marginal tax rates. This is also a common confusion for people, is they're really worried about, well, if I hit the next bracket, All my income's gonna be taxed at a crazy amount. That's not how it
[00:17:00] works. Marginal. You can think of that word, meaning the next dollar or the next amount over. Basically the first for a couple. It's about what? Like 20, $25,000. I'm pulling up. The rates here is taxed at 10%, so of their $70,000. The first section of it is taxed at 10%. Do you already have it up, Laura? It's on our agenda if you wanna look at it there, but yeah. You mean we, the prepared for the first 22,000 we did prepare. It's just on the next page. You just gotta scroll. Oh, I see . There we go. Okay. There it is. Perfect. Go ahead. So just talking about these, like Zacc saying, everybody pays the same rate on the first $22,000. It's 10% of your taxable income is taxed at 10%, and then the money over that up to about 90,000 is taxed at 12%, and then up to about 190,000, you're paying 22% on that income from 90. To 190,000, you're paying 22% on that. So it's a hundred. That bracket, that
[00:18:00] 22% bracket is about a hundred thousand dollars worth of income. I wish they made the tables look like that. Yeah. Cause I think it would confuse people less. You get 22,000 to 10%. and then $67,000 at 12%, a hundred thousand dollars at 22%. Like I wish they did it more clear like that. I think that would be helpful to see cuz some people worry, oh no, I'm going into the 24% tax bracket now I'm paying 24% on all of my dollars up to that. And when in reality it's not true, you're only paying on that dollar that's going over. Hundred 90,000 into that bracket, and the highest tax bracket is 37%. For a couple, you would need to have income of over $693,000, and just the income over that threshold is subject to the 37. For a single person, it's $578,000 of income. So that is a lot of income before you reach 37%. And by the way, these are some of the best tax rates we've seen in
[00:19:00] multiple decades. If you go back into the nineties, there was a time when the highest bracket was actually in the 90 something percent tax rate, and now it's 37%. The 10% is scheduled to stay the same. Let's maybe give you a little background. We had some tax cuts put in place that are set to sunset after 2025, so in 2026. We will see some different rates. Right now it goes 10, 12, 22 24. For most people in the future, it won't be 10, 12, 22 24. It'll go back to 10 15, 28, 33, so another seven to 8% depending on which bracket, and then only 3% on the 12 to 15, but the bottom line is rates are gonna go up in 2026 after 2020. Who knows what legislation will come out to change that, keep it where it is. They've been extending things and they've been keeping tax rates as low as possible. Bottom line politics definitely play a
[00:20:00] factor in this, and I don't know if I should say they've been keeping tax rates as low as possible. There are many arguments. The tax rates being lower could help. And just to clarify one thing, I think we missed one of the tax brackets, so it sounded like there was a bigger jump. Oh, than there was. They go up about 3%. So we have 10, 12, 22, 24. It'll be 10, 15, 25, 28. Oh, you're right. I skipped 25. Yeah, I went right to 28. You would be like, oh no, my 22 is going to 28. Well done. You're right. 22 to 25, so thank you. Let's review that. 10, 15, 25. And so the 22 goes up to 25, 20, 24 goes to four, goes up to 28, and I think the 32 goes to 33. 33. Yep. So that's only 1% there. And then the highest back then I believe was 39.6. Yep, you got it. So then that's really not that big of a change. I'll tell you what, the biggest jump. To be aware of is between the current rate of 12 and 22. That's an important line, and that line exists for single people at 44,000 and
[00:21:00] for married people at 90 roughly, you don't realize that every dollar you earn or have over 90,000 for a couple has a 10% higher rate than the dollar before that line. That's a pretty big jump. We watched that line really closely for retire. So some ideas around tax planning. If you have investments that are not inside retirement accounts, you can control your taxes quite well by what type of investments you own, how much they do in distributions, like dividends and capital gain distributions. How frequently you sell them versus holding them, you can actually harvest losses. We'll talk about some of those things. The big question for a lot of people is Roth versus traditional. We have an entire episode plan for that next one, so we won't go into a lot of detail right now, but that's one of our next topics to really hash out because it's such an important one. And it's important for not just people who are saving. It's also the same decision for someone who's in retire. Because you have the option to convert to a Roth ira and the math is the same. Just before you jump into this
[00:22:00] last point, maybe people have heard the terms, your marginal tax rate versus your effective tax rate. The marginal is the highest one that you got into. So say your last dollar was taxed at 24% and that's your marginal tax rate. Your effective tax rate is really the tax rate that you're paying. So they calculate, these were the total taxes that you paid in each. So they calculate each bracket, how much you paid, and then add up that total number. That's the amount of tax you're actually paying, and if you divide that by your overall income, that's your effective tax rate. So gonna be lower than your marginal tax rate, you're not gonna be paying an effective tax rate of 24%. In reality, it's gonna be lower than that. We see effective rates all the time in the five to 12% overall average tax rate for retirees. When you are working. Oftentimes, there's nothing you can do if you're making 200, $250,000 a year as a couple because all of that just shows up and you don't have a whole lot of flexibility. Now, self-employed
[00:23:00] people do have more flexibility. I'll explain that here in a second. . But the general concept is I find you don't have a whole lot of control when you're working and you have a W2 that just throws everything on your tax return. And I always say if you're paying a lot in taxes, it means you're making a lot of money. So there is a bright side to it. If you're paying nothing in taxes, yeah, that can be good, but it means maybe, probably income. Even a bigger problem. Yeah. Yeah, that's good point. What can be a good thing, we're not gonna go deep into business planning, but understand there are some decisions, and we'll go over this a little bit more in the business owner section. I think that's a little ways down the road in terms of season, so we should, I think that's our last season. Yeah. Okay. So we just wanted to mention this really quick because usually the first question people get around, wait, should I do an L L C or should I do an S-corp? I don't really know the difference. The bottom line is you have to pay FICA attacks, and we talked about FICA attacks back in the social security section. FICA tax is the employer and you paying social security
[00:24:00] each paying 6.2% for that and Medicare 1.45% for that. So it adds up to be about 15% overall and you have to pay that. If you are self-employed, you're paying both sides of it. If you are employed by someone else, you're paying your. Your employer is paying the other half. If you structure your business in a certain way, you can choose to quote, pay yourself a salary. And I said quote and did air quotes there. Did you see that? They didn't see it, but I saw it. I know I'm just losing my mind, but here we go. So you can pay yourself a salary and determine the amount on which you will pay FICA attacks, and then the rest. Come out without the F attacks as like an owner of an investment basically in your own business. That's something you can do with an s. Now a lot of people who end up doing this have to pay a little bit more in tax preparation fees and do more with a C P A to file the right quarterly taxes and payroll taxes for an corp.
[00:25:00] And it will affect your social security benefits. You gotta be aware of that. It'll reduce 'em a little bit, but I'm. Fine with that cuz it's not really that great of an investment in terms of like, if I'm gonna put my money in something I could probably do better than what they're gonna pay me back. And without going too far on a tangent, there is a point though that you get a lot of bang for your buck in social security. And we talked about bend points. And once you hit certain bend points, it doesn't really help you that much more. So you do wanna pay yourself a certain salary to get the big bang for your buck and then maybe taper off after that. But anyway, that's the main question that we. Different accountants will charge you thousand, $1,500 a year probably for your own personal return. And an S corp if it's crazy simple. And many of 'em will be a little bit more than that actually. Someone will get up into three or $4,000 a year depending on how much you're asking them to do. So you really need to figure out the tax savings. And so then you find that a lot of those people are making so much money that they end up maxing out the social security portion. Anyway, I can't remember the number keeps going up. It's somewhere around 150, right? That you don't have to pay social security
[00:26:00] taxes after that anyway, because that's the threshold. So you're really only saving about 3% for Medicare beyond that line. Anyway, that's the quick summary. On S-Corp versus LLCs. We just wanted to throw that in here because we didn't wanna make anybody wait too long to get into that. And I misspoke. It's actually season six. We're on season four. It's coming up. That's not the last one. Yeah, people, we have eight seasons planned for you. That's how much we care. We've got a lot going on here, but we're excited about taxes and that's weird, but we love it. And I think that if you can hang with us with that, what we just talked about, you're gonna be fine for the rest of this because we're gonna. Slow down and go over like one topic at a time. Next time is Roth and traditional. It's a big one. All right, thanks. This podcast is intended for informational purpose only and is not a substitute for personal advice from Capita. This is not a recommendation offer or solicitation to buy or sell
[00:27:00] any security. Past performance is not indicative. Or for a future results, there can be no assurance that investment objectives will be achieved. Different types of investments involve varying degrees of risk, including the loss of money invested. Therefore, it should not be assumed that future performance of any. Specific investment or investment strategy, including the investments or investment strategies recommended or proposed by Capita will be profitable. Further Capita does not provide legal or. Tax advice. Please consult with your legal or tax professional for advice prior to implementing any strategies discussed during this podcast, certain of the
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